Davis v. William Rosenzweig Realty Operating Co. , 192 N.Y. 128 ( 1908 )

In the case of Elterman v. Hyman, decided herewith, we held that a vendee of land under an executory contract for the purchase thereof, has a lien on the land for the amount paid pursuant to the contract; that when the vendee is without fault and the vendor cannot give good title, the former may sue in equity for a foreclosure of his lien and that the commencement of such an action is not a rescission of the contract but an affirmance thereof to secure a right given thereby and by payment pursuant to its terms. (Elterman v. Hyman, 192 N.Y. 125.)

In that case no rescission was alleged or found. In this case, however, the plaintiff alleged that the vendor falsely represented to the vendee that "the bottom of said lots was not made ground but natural ground;" that the vendee was deceived thereby and induced to sign the contract and pay the sum of $5,000 thereon. The complaint then continues as follows: "That upon learning that the said representations aforesaid were untrue, the plaintiff demanded of the defendants the return of the said sum of five thousand dollars and a rescission of the agreement aforesaid, but the defendants refused and still refuse to pay the said sum or any part thereof, or to rescind said agreement." The relief demanded was "that the said agreement be rescinded by reason of the false and fraudulent representations aforesaid; that the defendants be adjudged to pay the sum of five thousand dollars with interest from February 23rd, 1905, and that the plaintiff be adjudged to have a lien" upon the said premises and a foreclosure of the same.

The findings follow in substance the allegations of the complaint. The relief awarded was a rescission of the contract, the recovery of the $5,000 with interest from the date of payment, the establishment of a lien for the amount paid, the foreclosure thereof, and that upon a sale of the premises the money be brought into court; that the plaintiff be paid his $5,000 therefrom and that he recover judgment for any deficiency. The complaint was dismissed without costs as to one of the defendants who was held not to be proper party. The Appellate Division unanimously affirmed upon the authority of OccidentalRealty Co. v. Palmer (117 App. Div. 507). No question was raised by answer or during the trial as to the jurisdiction of the court and neither party demanded a trial by jury. Both parties tried the case on the theory that if the facts alleged in the complaint were established the plaintiff would be entitled to equitable relief of some kind.

The first question presented is whether the lien of a vendee for the amount paid on an executory contract for the purchase of land survives a rescission of the contract adjudged by a court of equity on the ground of fraud practiced by the vendor by which the vendee was induced to enter into the contract? Under the facts found the right of recovery at law for the sum paid is not questioned, but it is strenuously insisted that rescission destroys the contract and remits the parties to their original rights.

We held in the Elterman case that the vendee's lien was created by the contract and payment thereunder, and that upon default by the vendor without fault of the vendee the latter could foreclose his lien. If we reasoned correctly in that case there can be no lien without a contract. Payment on the contract pursuant to its requirements gives a lien by operation of law. The contract is the essential basis of the lien, for payment is simply an observance by the vendee of one of the express terms thereof. Rescission, therefore, destroys the contract ab initio and leaves the parties in the same situation as if no contract had ever been made. Under these circumstances there can be no lien.

The second question is whether, even if the plaintiff was not entitled to a vendee's lien, the action was properly brought in equity for a rescission of the contract on the ground of fraud?

In Becker v. Church (115 N.Y. 562, 565) we said through Judge GRAY: "There cannot be any doubt as to the jurisdiction of courts of equity over actions to cancel and set aside instruments on the ground of fraud in their procurement. Such actions are in the nature of preventive remedies. The existence of the instruments may be a well-founded source of anticipated danger by the party whom they do, or whom they are designed to affect. The reason for the maintenance of the action for their avoidance is to be found in the reasonable apprehension that the evidence of the fraud may not be always attainable, or that the defense of fraud may not always be available at law."

The general rule governing the subject is well set forth in 24 American and English Encyclopædia of Law (2nd ed.), 615, as follows: "Where the complainant in equity seeks to have a contract totally rescinded and declared void for fraud, the fact that he seeks also a recovery of money is not sufficient ground for the refusal of the court to entertain jurisdiction; for in an action at law the recovery of money is the principal object, while in the suit in equity the rescission of the contract is the principal matter of relief and the recovery of money is merely an incidental although a necessary consequence; hence, the court being properly in possession of the cause for the purpose of granting purely equitable relief, will proceed to do complete justice between the parties, although a part of the relief granted is purely legal in its nature. This principle is in full accordance with the broader principle of equity, that in all cases of fraud, if the party defrauded is entitled to any equitable relief as to the contract in which he has been defrauded and if it is necessary for him to establish the fraud in order to obtain this relief, the court will grant him full and entire relief, notwithstanding that as to a part thereof he has a perfect remedy in an action for damages at law."

As was said in Vail v. Reynolds (118 N.Y. 297, 302): "A person who has been induced by fraudulent representations to become the purchaser of property has upon discovery of the fraud three remedies open to him, either of which he may elect. He may rescind the contract absolutely and sue in an action at law to recover the consideration parted with upon the fraudulent contract. * * * He may bring an action in equity to rescind the contract and in that action have full relief. (Allerton v.Allerton, 50 N.Y. 670.) Such an action is not founded upon a rescission, but is maintained for a rescission, and it is sufficient, therefore, for the plaintiff to offer in his complaint to return what he has received and make a tender of it on the trial. Lastly, he may retain what he has received and bring an action at law to recover the damages sustained."

The plaintiff in this action adopted the second course suggested by bringing an action in equity to rescind and when rescission was decreed he became entitled to full relief, which included as an incident to rescission the recovery of the amount paid on the execution of the contract. Rescission was the primary right demanded by the plaintiff in his complaint and, as was well said by the appellant's counsel: "Whatever legal relief was claimed in this action was purely incidental and tributary to the equitable relief." When the contract fell all rights derived therefrom by either party fell with it. The plaintiff had no right to a lien depending on the contract and the defendant had no right to retain the amount paid on the contract. While the court had no power to render judgment establishing a lien, it had power to decree rescission and follow it by such further relief as was appropriate to rescission, even if it involved a judgment for money only. (Baily v. Hornthal, 154 N.Y. 648, 660.) If rescission had not been decreed there could have been no judgment for money, but that legal relief necessarily followed the equitable relief that was granted. The fact that the plaintiff demanded more than he was entitled to is not important, because when an answer has been interposed the Code provides that "the court may permit the plaintiff to take any judgment, consistent with the case made by the complaint, and embraced within the issue." (Code Civ. Pro. § 1207.)

I think that the trial court, according to the allegations of the complaint and the facts found, which are conclusive upon us, properly rendered judgment for a rescission of the contract and a return of the money paid thereon, but improperly for a lien and the foreclosure thereof, with judgment for deficiency.

The judgment appealed from should be modified by striking therefrom all provisions relating to a lien, the foreclosure thereof and judgment for deficiency, and as thus modified affirmed, without costs in this court to either party.